Decommissioning liability

Decommissioning cost (site restoration cost) is normally incurred in case of oil exploration and other natural resources exploration industry. This represents the cost incurred to resurface the land or other natural resource once the exploration is done. This is normally required by the government to avoid the environmental hazards.

  If the agreement with the government or other authority requires such liability then following accounting treatment  shall be done as under:-

·         Initial estimation of the costs of dismantling the equipments and facilities and restoring the site shall be performed; and

·         The estimated costs shall be included as part of the additions to fixed assets and depreciated over its useful life. Such depreciation will be charged to the income statement as a normal depreciation charge.

The initial estimate of such costs should be based on the present value of the future cash outflows which shall be revisited at each year end. This can be better understood by way of an illustration given below- (refer attachment)

Subsequent to initial recognition, such capitalized cost will be depreciated over the remaining useful life of the asset. The weighted average cost of capital shall be used as a discount rate for the purpose of computing the present value of future cash outflows on account of site restoration costs.